In a wonderful book, “Risk Savvy: How to Make Good Decisions“, the author, Gerd Gigerenzer , writes on the three “faces” of probability.
“Probability is not one of a kind; it was born with three faces: frequency, physical design, and degrees of belief. And these have persisted to this day.
Frequency. In the first of its identities, probability is about counting. Counting the number of days with rainfall or the number of hits a baseball player makes and dividing these by the total number of days or strikes results in probabilities that are relative frequencies. Their historical origins lie in seventeenth-century mortality tables, from which life insurances calculated probabilities of death.
Physical Design. Second, probability is about constructing. For example, if a die is constructed to be perfectly symmetrical, then the probability of rolling a six is one in six. You don’t have to count. Similarly, mechanical slot machines are physically designed to payout, say, 80 percent of what people throw in, and electronic machines have software that determines the probabilities. Probabilities by design are called propensities. Historically, games of chance were the prototype for propensity. These risks are known because people crafted, not counted, them.
Degrees of Belief
Risk Savvy: How to Make Good Decisions – Description
An eye-opening look at the ways we misjudge risk every day and a guide to making better decisions with our money, health, and personal lives
In the age of Big Data we often believe that our predictions about the future are better than ever before. But as risk expert Gerd Gigerenzer shows, the surprising truth is that in the real world, we often get better results by using simple rules and considering less information.
In Risk Savvy: How to Make Good Decisions, Gigerenzer reveals that most of us, including doctors, lawyers, financial advisers, and elected officials, misunderstand statistics much more often than we think, leaving us not only misinformed, but vulnerable to exploitation. Yet there is hope. Anyone can learn to make better decisions for their health, finances, family, and business without needing to consult an expert or a super computer, and Gigerenzer shows us how.
Risk Savvy: How to Make Good Decisions is an insightful and easy-to-understand remedy to our collective information overload and an essential guide to making smart, confident decisions in the face of uncertainty.